Ben Felix: 2.7% Retirement Rule.

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
NiceUnparticularMan
Posts: 4827
Joined: Sat Mar 11, 2017 6:51 am

Re: Ben Felix: 2.7% Retirement Rule.

Post by NiceUnparticularMan »

CuriousTacos wrote: Mon Jan 09, 2023 11:44 am Edit: it is strange that his later work suggests a worst case of 1937 for the US domestic investor with a SWR of 3.94%, while the US globally diversified investor had a worst case of 3.45% for the same start year. This still suggests that global diversification did not help US investors in the past, but the worst start year and SWRs are very different from his previous work.
I don't know about this case, but I recall generally there is quite a bit of sensitivity to what you use for the fixed-income part of the portfolio. But data limits often impose portfolios that would not necessarily resemble what people would pick today.
randomguy
Posts: 10678
Joined: Wed Sep 17, 2014 9:00 am

Re: Ben Felix: 2.7% Retirement Rule.

Post by randomguy »

Marseille07 wrote: Mon Jan 09, 2023 9:54 am
No, I'm not talking about 6% becoming 5%.

Let me give you a clear example. The 1929 retirees' SWR is estimated to be around 4.2% (the Great Depression era). Imagine instead of US only, you add international diversification and buy companies in Nazi Germany and Imperial Japan, then walk into World War II. This retiree's SWR can easily breach 4.2% and possibly lower than 3.8% because you added international diversification instead of US only.
It can also go to 4.5% as the outperformance of german stocks in the 30s covers for the US underperformance. As I said people have run the numbers and things go higher.
Marseille07
Posts: 12872
Joined: Fri Nov 06, 2020 12:41 pm

Re: Ben Felix: 2.7% Retirement Rule.

Post by Marseille07 »

randomguy wrote: Mon Jan 09, 2023 12:45 pm It can also go to 4.5% as the outperformance of german stocks in the 30s covers for the US underperformance. As I said people have run the numbers and things go higher.
I'm not aware of an SWR study using VT-like portfolio & 1929~1959's data. If you have something, I'd like to see that.
94% US & FM (5% seed) | 6% CCE
Marseille07
Posts: 12872
Joined: Fri Nov 06, 2020 12:41 pm

Re: Ben Felix: 2.7% Retirement Rule.

Post by Marseille07 »

NiceUnparticularMan wrote: Mon Jan 09, 2023 10:53 am I don't know off hand what different portfolios look like in that period immediately after 1929, but you definitely cannot assume that what eventually happened to German stocks much later in time automatically made global portfolios worse during that period immediately after 1929 than US-only portfolios.

Then by the time German stocks do actually crash, US-only SWRs are much higher again.
I'm not assuming, I just illustrated a time period where adding international diversification could lower the SWR than holding 100% US. Someone needs to analyze w/ more data. But suggesting this possibility isn't at all a crazy idea.
94% US & FM (5% seed) | 6% CCE
Topic Author
Apathizer
Posts: 1937
Joined: Sun Sep 26, 2021 2:56 pm

Re: Ben Felix: 2.7% Retirement Rule.

Post by Apathizer »

Marseille07 wrote: Mon Jan 09, 2023 2:19 pm
NiceUnparticularMan wrote: Mon Jan 09, 2023 10:53 am I don't know off hand what different portfolios look like in that period immediately after 1929, but you definitely cannot assume that what eventually happened to German stocks much later in time automatically made global portfolios worse during that period immediately after 1929 than US-only portfolios.

Then by the time German stocks do actually crash, US-only SWRs are much higher again.
I'm not assuming, I just illustrated a time period where adding international diversification could lower the SWR than holding 100% US. Someone needs to analyze w/ more data. But suggesting this possibility isn't at all a crazy idea.
That's unlikely though. The likelihood both US and ex-US will be down simultaneously is lower than either individually.
ROTH: 35% AVGE, 20% AVUS, 15% DFAX, 30% BNDW. Taxable: 50% BNDW, 25% AVGE, 15% AVUS, 10% DFAX
randomguy
Posts: 10678
Joined: Wed Sep 17, 2014 9:00 am

Re: Ben Felix: 2.7% Retirement Rule.

Post by randomguy »

Marseille07 wrote: Mon Jan 09, 2023 2:19 pm
NiceUnparticularMan wrote: Mon Jan 09, 2023 10:53 am I don't know off hand what different portfolios look like in that period immediately after 1929, but you definitely cannot assume that what eventually happened to German stocks much later in time automatically made global portfolios worse during that period immediately after 1929 than US-only portfolios.

Then by the time German stocks do actually crash, US-only SWRs are much higher again.
I'm not assuming, I just illustrated a time period where adding international diversification could lower the SWR than holding 100% US. Someone needs to analyze w/ more data. But suggesting this possibility isn't at all a crazy idea.
People have done the math. And for the normal recommended diversification levels (things like 40/20/40 US/International/US bonds), it has always helped. Nobody thinks that is some fundamental law of nature. It is like the 4% rule which is an observation of history not a natural law. It also hasn't mattered much for the US investor. Getting another .2% isn't exactly game changing. And if you want to argue methodology and data sets feel free. I have always wondered how Pfau got a safemax year of 1937 versus the 1966 of most other studies. Something in the methodology/data is give than couple tenths of difference. Now if your are in some 2.2% SWR country, getting 3.5% is a pretty big change.
CuriousTacos
Posts: 430
Joined: Thu Apr 12, 2018 3:31 pm

Re: Ben Felix: 2.7% Retirement Rule.

Post by CuriousTacos »

randomguy wrote: Mon Jan 09, 2023 10:32 pm People have done the math. And for the normal recommended diversification levels (things like 40/20/40 US/International/US bonds), it has always helped. Nobody thinks that is some fundamental law of nature. It is like the 4% rule which is an observation of history not a natural law. It also hasn't mattered much for the US investor. Getting another .2% isn't exactly game changing. And if you want to argue methodology and data sets feel free. I have always wondered how Pfau got a safemax year of 1937 versus the 1966 of most other studies. Something in the methodology/data is give than couple tenths of difference. Now if your are in some 2.2% SWR country, getting 3.5% is a pretty big change.
I'd be interested to see the studies you're referring to
User avatar
JoMoney
Posts: 14890
Joined: Tue Jul 23, 2013 5:31 am

Re: Ben Felix: 2.7% Retirement Rule.

Post by JoMoney »

Apathizer wrote: Mon Jan 09, 2023 2:25 pm... The likelihood both US and ex-US will be down simultaneously is lower than either individually.
:confused Looking at charts of funds of US and global ex-US, while the magnitude of their ups-and-downs vary, most of the time they're going in the same direction. They're something like .86 correlated
PV LINK
If one of them is "up" or "down", it's more likely than not that the other is going the same direction.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
NiceUnparticularMan
Posts: 4827
Joined: Sat Mar 11, 2017 6:51 am

Re: Ben Felix: 2.7% Retirement Rule.

Post by NiceUnparticularMan »

Marseille07 wrote: Mon Jan 09, 2023 2:19 pm
NiceUnparticularMan wrote: Mon Jan 09, 2023 10:53 am I don't know off hand what different portfolios look like in that period immediately after 1929, but you definitely cannot assume that what eventually happened to German stocks much later in time automatically made global portfolios worse during that period immediately after 1929 than US-only portfolios.

Then by the time German stocks do actually crash, US-only SWRs are much higher again.
I'm not assuming, I just illustrated a time period where adding international diversification could lower the SWR than holding 100% US. Someone needs to analyze w/ more data. But suggesting this possibility isn't at all a crazy idea.
I was referring specifically to assuming global diversification lowered the SWR in 1929.

To review the bidding, there is no doubt that if you pick times when US stocks were about to significantly outperform ex-US stocks in the next medium period, then at those times the SWR would be higher with only US stocks. The point made above was that generally those have been times when either way the SWR would be well above 4%.

You offered 1929 specifically as a time when the US-only SWR was low to begin with, and suggested maybe the globally diverse SWR would be lower still, due to what happened many years later to German and Japanese stocks. To my knowledge, no one has shown that to actually be true as of 1929.
ncbill
Posts: 1658
Joined: Sun Jul 06, 2008 4:03 pm
Location: Western NC

Re: Ben Felix: 2.7% Retirement Rule.

Post by ncbill »

JoMoney wrote: Mon Jan 09, 2023 10:33 am
Marseille07 wrote: Mon Jan 09, 2023 9:54 am
randomguy wrote: Mon Jan 09, 2023 2:54 am You are missing that the periods where you go from 6% to 5% don't change the SWR. As I said numerous people have looked at it and run the math. SWR go up with diversification. The times when international has underperformed, US performance has been high enough so it didn't matter. The 2000 period might break this but so far the outperformance of International during the first decade is making up for a lot of the putrid returns of the past decade. It looks like that will not be the SWR year. Obviously there are plenty of years left to change that.
No, I'm not talking about 6% becoming 5%.

Let me give you a clear example. The 1929 retirees' SWR is estimated to be around 4.2% (the Great Depression era). Imagine instead of US only, you add international diversification and buy companies in Nazi Germany and Imperial Japan, then walk into World War II. This retiree's SWR can easily breach 4.2% and possibly lower than 3.8% because you added international diversification instead of US only.
There is no safety with stocks. No amount of back-testing provides any sway over the probabilities of the future that is unknowable.
If you can show that some negative event happened in the past, It may help prove to falsify a claim, as the past 15+ years should have done for the portfolio theorists promising that international diversification would raise the portfolios 'risk adjusted return' - It doesn't, and it's not the first long period of time to demonstrate that it doesn't. Mr. Bogle wrote a whole chapter in 'Common Sense on Mutual Funds' laying out the problems with that claim and its failures. The proponents can point to a time that did work, if you had the right proportions balanced just right, but that doesn't absolve the fact that numerous other times it didn't, it just shows that the claim is spurious noise that's "not even wrong" (which would suggest you could get some advantage by taking the opposite approach.)
If reducing risk is the objective, you don't do that with by changing the flavor of your stocks, you use bonds or other fixed-income that offers an explicit promise of it's return (transferring the risk to the bond issuer), the whole point of equity ownership is to be able to share equitably any unknown gains AND losses.
The great thing right now, is (relative to a year ago) bonds are offering much higher rates. Including TIPS with a U.S. Government guarantee of inflation indexing. If someone is of the belief that their stock portfolio won't support a 30 year 4% SWR, the option is clearly right in front of them to build a 30 year TIPS ladder (at the current roughly 1.4% real rate) that will allow for a 30 year 4.2% "SWR" guaranteed.... and by implied expectation for nominal bonds relative to TIPS one could buy a SPIA life annuity that would guarantee similar return but at a fixed nominal rate for however long the annuitant lives.
So we're back Bernstein's 'Retirement Calculator from Hell' where "any estimate of long-term financial success greater than about 80% is meaningless."

http://www.efficientfrontier.com/ef/901/hell3.htm

That's why I object to including countries where both equity and bond instruments went to zero over the long period of the study.

For those markets we can't financially model such absolute financial disaster.

Nor would foreign investments save investors in those countries given their strict capital controls, outright bans on holding foreign assets or other stores of value such as gold...the latter included the USA for roughly 40 years.
Last edited by ncbill on Tue Jan 10, 2023 10:21 am, edited 1 time in total.
Marseille07
Posts: 12872
Joined: Fri Nov 06, 2020 12:41 pm

Re: Ben Felix: 2.7% Retirement Rule.

Post by Marseille07 »

NiceUnparticularMan wrote: Tue Jan 10, 2023 8:09 am You offered 1929 specifically as a time when the US-only SWR was low to begin with, and suggested maybe the globally diverse SWR would be lower still, due to what happened many years later to German and Japanese stocks. To my knowledge, no one has shown that to actually be true as of 1929.
Well that's kind of the point, right? We aren't interested in analyzing periods when the US SWR was calculated to be 6% and becoming 5% after adding international.

Although I'm puzzled by your notion of "many years later" and "as of 1929." When we talk about the 1929 cohort, we are talking about 1929-1958...not just 1929 or only few years later. If equities got destroyed "many years later" because they lost World War II, that's very much part of their retirement horizon whether they knew in 1929 or not. SWR is only derivable in hindsight.
94% US & FM (5% seed) | 6% CCE
NiceUnparticularMan
Posts: 4827
Joined: Sat Mar 11, 2017 6:51 am

Re: Ben Felix: 2.7% Retirement Rule.

Post by NiceUnparticularMan »

Marseille07 wrote: Tue Jan 10, 2023 8:56 am Although I'm puzzled by your notion of "many years later" and "as of 1929." When we talk about the 1929 cohort, we are talking about 1929-1958...not just 1929 or only few years later. If equities got destroyed "many years later" because they lost World War II, that's very much part of the equation whether they knew in 1929 or not. SWR is only derivable in hindsight.
That is because of the importance of sequence of returns. The reason why certain years are particularly challenging is what is about to happen to the relevant portfolios in real terms over the next medium period of years (meaning not as long as 20-30, more like 10-15) is going to be particularly challenging, such that even much better results in the later part of the period are not enough for a higher fixed real WR to survive the initial period.

1929 happens to be basically the opposite of that sort of scenario for a globally diversified portfolio. As another poster explained in depth, for the first part of the sequence starting in 1929, German stocks, say, were actually on the whole outperforming US stocks. Then in back part of the sequence, it is true German stocks crashed, but that matters less at that point because of this sequence of returns issue. By the way, of course German stocks were not all other ex-US stocks.

OK, so starting in 1929, did the later harm from German stocks outweigh the earlier help from German stocks? Did whatever happen with ex-US stocks later outweigh whatever happened with them earlier? This is an empirical question and you would have to run it through your model to get an answer. But you certainly can't assume any harms on the back end outweighed any help on the front end, and so far I have not seen any demonstration about the answers to these questions as to 1929.
Marseille07
Posts: 12872
Joined: Fri Nov 06, 2020 12:41 pm

Re: Ben Felix: 2.7% Retirement Rule.

Post by Marseille07 »

NiceUnparticularMan wrote: Tue Jan 10, 2023 9:36 am That is because of the importance of sequence of returns. The reason why certain years are particularly challenging is what is about to happen to the relevant portfolios in real terms over the next medium period of years (meaning not as long as 20-30, more like 10-15) is going to be particularly challenging, such that even much better results in the later part of the period are not enough for a higher fixed real WR to survive the initial period.

1929 happens to be basically the opposite of that sort of scenario for a globally diversified portfolio. As another poster explained in depth, for the first part of the sequence starting in 1929, German stocks, say, were actually on the whole outperforming US stocks. Then in back part of the sequence, it is true German stocks crashed, but that matters less at that point because of this sequence of returns issue. By the way, of course German stocks were not all other ex-US stocks.

OK, so starting in 1929, did the later harm from German stocks outweigh the earlier help from German stocks? Did whatever happen with ex-US stocks later outweigh whatever happened with them earlier? This is an empirical question and you would have to run it through your model to get an answer. But you certainly can't assume any harms on the back end outweighed any help on the front end, and so far I have not seen any demonstration about the answers to these questions as to 1929.
Who posted German stocks outperforming US stocks between 1929~1944? I must have missed that.

I thought you posted a chart where the y-axis showing an increase from 8.5 to 11 over the course of 14 years, which was 1.85% CAGR excluding dividends.
By the way, of course German stocks were not all other ex-US stocks.
Yes, I actually mentioned Imperial Japan as well. If you ignored it that's your omission not mine. The UK was also much bigger than it is today.
94% US & FM (5% seed) | 6% CCE
Marseille07
Posts: 12872
Joined: Fri Nov 06, 2020 12:41 pm

Re: Ben Felix: 2.7% Retirement Rule.

Post by Marseille07 »

JoMoney wrote: Tue Jan 10, 2023 1:01 am
Apathizer wrote: Mon Jan 09, 2023 2:25 pm... The likelihood both US and ex-US will be down simultaneously is lower than either individually.
:confused Looking at charts of funds of US and global ex-US, while the magnitude of their ups-and-downs vary, most of the time they're going in the same direction. They're something like .86 correlated
PV LINK
If one of them is "up" or "down", it's more likely than not that the other is going the same direction.
I think adding international *could* help in some cases despite the .86 correlation. The 1966 cohort was a good example. That said, your backtest clearly shows that that was an anomaly rather than the norm.
94% US & FM (5% seed) | 6% CCE
NiceUnparticularMan
Posts: 4827
Joined: Sat Mar 11, 2017 6:51 am

Re: Ben Felix: 2.7% Retirement Rule.

Post by NiceUnparticularMan »

Marseille07 wrote: Tue Jan 10, 2023 10:15 amWho posted German stocks outperforming US stocks between 1929~1944? I must have missed that.
Sorry, that was very poorly worded of me. Alpha4 discussed ex-US stocks in this period, and that discussion included German stocks, but it was not limited to German stocks.
I thought you posted a chart where the y-axis showing an increase from 8.5 to 11 over the course of 14 years, which was 1.85% CAGR excluding dividends.
Correct, if you look between the 1929 peak and the closing of the exchanges. Over the same period, the comparable US stock index (the DJIA) had large negative, not positive, returns (this is also ex dividend). Looks like something like -7.7% CAGR. I don't believe the DJIA hit a new high again until 1954.

So again I am not claiming to have done all the math on this, but I think it is true German stocks had generally outperformed US stocks between 1929 and the closing of their exchanges.
Yes, I actually mentioned Imperial Japan as well. If you ignored it that's your omission not mine. The UK was also much bigger than it is today.
Sure, I wasn't claiming I had done a complete analysis either, just explaining why we couldn't assume what happened to German stocks was bad on net for 1929 retirees with a global stock portfolio.

I don't know what happened to Japan stocks in that period, actually, but I do know a little about UK stocks:

Image

Looking at just the end points, they didn't do as well as German stocks, but considerably better than US stocks. However, that is a notably different path from German stocks, and again to do this seriously you have to put them into a model.
Marseille07
Posts: 12872
Joined: Fri Nov 06, 2020 12:41 pm

Re: Ben Felix: 2.7% Retirement Rule.

Post by Marseille07 »

NiceUnparticularMan wrote: Tue Jan 10, 2023 12:17 pm
Marseille07 wrote: Tue Jan 10, 2023 10:15 amWho posted German stocks outperforming US stocks between 1929~1944? I must have missed that.
Sorry, that was very poorly worded of me. Alpha4 discussed ex-US stocks in this period, and that discussion included German stocks, but it was not limited to German stocks.
I thought you posted a chart where the y-axis showing an increase from 8.5 to 11 over the course of 14 years, which was 1.85% CAGR excluding dividends.
Correct, if you look between the 1929 peak and the closing of the exchanges. Over the same period, the comparable US stock index (the DJIA) had large negative, not positive, returns (this is also ex dividend). Looks like something like -7.7% CAGR. I don't believe the DJIA hit a new high again until 1954.

So again I am not claiming to have done all the math on this, but I think it is true German stocks had generally outperformed US stocks between 1929 and the closing of their exchanges.
Yes, I actually mentioned Imperial Japan as well. If you ignored it that's your omission not mine. The UK was also much bigger than it is today.
Sure, I wasn't claiming I had done a complete analysis either, just explaining why we couldn't assume what happened to German stocks was bad on net for 1929 retirees with a global stock portfolio.

I don't know what happened to Japan stocks in that period, actually, but I do know a little about UK stocks:

Image

Looking at just the end points, they didn't do as well as German stocks, but considerably better than US stocks. However, that is a notably different path from German stocks, and again to do this seriously you have to put them into a model.
Thanks. For some reason I had missed Alpha4's excellent analysis. It appears the 1929 SWR would stay more or less the same.
94% US & FM (5% seed) | 6% CCE
NiceUnparticularMan
Posts: 4827
Joined: Sat Mar 11, 2017 6:51 am

Re: Ben Felix: 2.7% Retirement Rule.

Post by NiceUnparticularMan »

Marseille07 wrote: Tue Jan 10, 2023 12:51 pm Thanks. For some reason I had missed Alpha4's excellent analysis. It appears the 1929 SWR would stay more or less the same.
By the way, looking at these graphs, it is pretty intuitive why 1937ish could be worse for global portfolios. US stocks were about to have another poor period, and UK stocks were also going to do poorly (although not as bad). However, now we get the German crash (and I assume a Japanese crash) sufficiently on the horizon to probably wipe out whatever help German stocks would briefly have provided.
Marseille07
Posts: 12872
Joined: Fri Nov 06, 2020 12:41 pm

Re: Ben Felix: 2.7% Retirement Rule.

Post by Marseille07 »

NiceUnparticularMan wrote: Tue Jan 10, 2023 1:29 pm By the way, looking at these graphs, it is pretty intuitive why 1937ish could be worse for global portfolios. US stocks were about to have another poor period, and UK stocks were also going to do poorly (although not as bad). However, now we get the German crash (and I assume a Japanese crash) sufficiently on the horizon to probably wipe out whatever help German stocks would briefly have provided.
1916, 1929, 1937 are all good candidates for investigation according to this plot: Image

30-year periods are a long time. As mentioned, even the 1929 cohort (ending in 1958) includes the German and the Japanese crash.
94% US & FM (5% seed) | 6% CCE
Topic Author
Apathizer
Posts: 1937
Joined: Sun Sep 26, 2021 2:56 pm

Re: Ben Felix: 2.7% Retirement Rule.

Post by Apathizer »

JoMoney wrote: Tue Jan 10, 2023 1:01 am
Apathizer wrote: Mon Jan 09, 2023 2:25 pm... The likelihood both US and ex-US will be down simultaneously is lower than either individually.
:confused Looking at charts of funds of US and global ex-US, while the magnitude of their ups-and-downs vary, most of the time they're going in the same direction. They're something like .86 correlated
PV LINK
If one of them is "up" or "down", it's more likely than not that the other is going the same direction.
But the imperfect correlation and dispersion of ex-US markets relative to the US is still beneficial and reduces overall volatility. Even when they move in the same direction, the degree of movement varies significantly.
ROTH: 35% AVGE, 20% AVUS, 15% DFAX, 30% BNDW. Taxable: 50% BNDW, 25% AVGE, 15% AVUS, 10% DFAX
NiceUnparticularMan
Posts: 4827
Joined: Sat Mar 11, 2017 6:51 am

Re: Ben Felix: 2.7% Retirement Rule.

Post by NiceUnparticularMan »

Marseille07 wrote: Tue Jan 10, 2023 1:53 pm 30-year periods are a long time. As mentioned, even the 1929 cohort (ending in 1958) includes the German and the Japanese crash.
Right, but because of the SOR issue, it typically matters whether such a crash happens sooner or later in the sequence.

By the way, this might be a good time for me to note that while I find this somewhat interesting as a historical question, I don't think it is particularly illuminating as to how people should be planning for retirement in 2022. A lot has changed since 1929 and 1937.
Marseille07
Posts: 12872
Joined: Fri Nov 06, 2020 12:41 pm

Re: Ben Felix: 2.7% Retirement Rule.

Post by Marseille07 »

NiceUnparticularMan wrote: Tue Jan 10, 2023 2:53 pm By the way, this might be a good time for me to note that while I find this somewhat interesting as a historical question, I don't think it is particularly illuminating as to how people should be planning for retirement in 2022. A lot has changed since 1929 and 1937.
Well, planning for 2022 wasn't the intent of this exercise. It was to explore if adding international would have improved or deproved the SWR. And all it takes is one bad retirement horizon to push the whole thing down, so going over this was worthwhile.
94% US & FM (5% seed) | 6% CCE
User avatar
Lawrence of Suburbia
Posts: 454
Joined: Mon Aug 08, 2022 12:04 pm

Re: Ben Felix: 2.7% Retirement Rule.

Post by Lawrence of Suburbia »

Rob Berger has just posted a video on this subject (re: Ben Felix's 2.7%) which adds clarity and common sense:

https://youtu.be/oYX7JXW1Jbk
I know that you believe you understand what you think I said; but I am not sure you realise that what you heard is not what I meant.
Marseille07
Posts: 12872
Joined: Fri Nov 06, 2020 12:41 pm

Re: Ben Felix: 2.7% Retirement Rule.

Post by Marseille07 »

Lawrence of Suburbia wrote: Wed Jan 11, 2023 7:57 pm Rob Berger has just posted a video on this subject (re: Ben Felix's 2.7%) which adds clarity and common sense:

https://youtu.be/oYX7JXW1Jbk
Thanks. I like Rob Berger and I'm watching it now.
94% US & FM (5% seed) | 6% CCE
User avatar
Prokofiev
Posts: 1204
Joined: Mon Feb 19, 2007 8:45 pm
Location: New Orleans

Re: Ben Felix: 2.7% Retirement Rule.

Post by Prokofiev »

Apathizer wrote: Tue Jan 10, 2023 2:02 pm
JoMoney wrote: Tue Jan 10, 2023 1:01 am
Apathizer wrote: Mon Jan 09, 2023 2:25 pm... The likelihood both US and ex-US will be down simultaneously is lower than either individually.
:confused Looking at charts of funds of US and global ex-US, while the magnitude of their ups-and-downs vary, most of the time they're going in the same direction. They're something like .86 correlated
PV LINK
If one of them is "up" or "down", it's more likely than not that the other is going the same direction.
But the imperfect correlation and dispersion of ex-US markets relative to the US is still beneficial and reduces overall volatility. Even when they move in the same direction, the degree of movement varies significantly.
Actually, your first claim is absolutely true. Must be. Basic probability.

"The likelihood both US and ex-US will be down simultaneously is lower than either individually"

Consider 2 events A and B. The joint probability of both A and B being true cannot be larger than the SMALLER or the probability of A or B.

Say the US market is down once every 5 years (20%). And foreign equities are down every 4 years (25%).
Even with near-perfect correlation, they can only both be down 20%. Never more since the US is never down more than 20% of the time. (Of course, the numbers I gave imply non-perfect correlation!)

With the actual correlation, there is probably at least 1 or 2 years where foreign is up when US is down. So the A AND B probability (both being down) might be 17-19%, but not more than 20% (all made-up numbers for illustration)
Everything should be made as simple as possible, but not simpler - Einstein
halfnine
Posts: 1994
Joined: Tue Dec 21, 2010 12:48 pm

Re: Ben Felix: 2.7% Retirement Rule.

Post by halfnine »

Global diversification reduces the far left tails associated with country risk.

The fact that a far left tail really hasn't shown up in the US doesn't mean that it won't.

If events occur that lead to a 2.7% withdrawal rate there will be large tears that hold the social fabric together in the US. Having saved enough for a 2.7% WR won't necessarily insulate you from this as you'll have bigger problems to face. Even if one was to concede the possibility, there is really very little actionable about a 2.7% WR.
Topic Author
Apathizer
Posts: 1937
Joined: Sun Sep 26, 2021 2:56 pm

Re: Ben Felix: 2.7% Retirement Rule.

Post by Apathizer »

Prokofiev wrote: Wed Jan 11, 2023 9:57 pm
Apathizer wrote: Tue Jan 10, 2023 2:02 pm
JoMoney wrote: Tue Jan 10, 2023 1:01 am
Apathizer wrote: Mon Jan 09, 2023 2:25 pm... The likelihood both US and ex-US will be down simultaneously is lower than either individually.
:confused Looking at charts of funds of US and global ex-US, while the magnitude of their ups-and-downs vary, most of the time they're going in the same direction. They're something like .86 correlated
PV LINK
If one of them is "up" or "down", it's more likely than not that the other is going the same direction.
But the imperfect correlation and dispersion of ex-US markets relative to the US is still beneficial and reduces overall volatility. Even when they move in the same direction, the degree of movement varies significantly.
Actually, your first claim is absolutely true. Must be. Basic probability.

"The likelihood both US and ex-US will be down simultaneously is lower than either individually"

Consider 2 events A and B. The joint probability of both A and B being true cannot be larger than the SMALLER or the probability of A or B.

Say the US market is down once every 5 years (20%). And foreign equities are down every 4 years (25%).
Even with near-perfect correlation, they can only both be down 20%. Never more since the US is never down more than 20% of the time. (Of course, the numbers I gave imply non-perfect correlation!)

With the actual correlation, there is probably at least 1 or 2 years where foreign is up when US is down. So the A AND B probability (both being down) might be 17-19%, but not more than 20% (all made-up numbers for illustration)
An understanding of basic probability is invaluable in many areas and this is especially the case with investing. The likelihood of any number of independent events happening simultaneously is lower than any one of them happening individually. In investing, while individual country performance probably isn't entirely independent from that of other countries, I would argue individual country performance is at least somewhat independent. This is why global diversification reduces volatility.

Thanks for providing detailed math. :D
ROTH: 35% AVGE, 20% AVUS, 15% DFAX, 30% BNDW. Taxable: 50% BNDW, 25% AVGE, 15% AVUS, 10% DFAX
NiceUnparticularMan
Posts: 4827
Joined: Sat Mar 11, 2017 6:51 am

Re: Ben Felix: 2.7% Retirement Rule.

Post by NiceUnparticularMan »

Marseille07 wrote: Tue Jan 10, 2023 6:08 pm And all it takes is one bad retirement horizon to push the whole thing down, so going over this was worthwhile.
Sure, but just to be clear on my own views--I think the bad retirement scenarios that happened in 1929 or 1937 are now essentially impossible due to changes since then. Meanwhile, there are bad retirement scenarios that are possible now that were not possible then, with a non-negligible probability of happening. Many of which would be firsts in history.

So while it is historically interesting to me what happened back then, nonetheless what did happen, or what did not happen, in periods like that is not to me relevant information as to what might happen in, say 2023-2033.
Marseille07
Posts: 12872
Joined: Fri Nov 06, 2020 12:41 pm

Re: Ben Felix: 2.7% Retirement Rule.

Post by Marseille07 »

NiceUnparticularMan wrote: Thu Jan 12, 2023 6:01 am Sure, but just to be clear on my own views--I think the bad retirement scenarios that happened in 1929 or 1937 are now essentially impossible due to changes since then. Meanwhile, there are bad retirement scenarios that are possible now that were not possible then, with a non-negligible probability of happening. Many of which would be firsts in history.

So while it is historically interesting to me what happened back then, nonetheless what did happen, or what did not happen, in periods like that is not to me relevant information as to what might happen in, say 2023-2033.
Well, that's a big can of worms because if you go down that route then arguably 1966 is also impossible to repeat due to changes since then. I know there was one Fed chair who aggravated inflation by cutting rates too early and this policy mistake before Volcker came in ended up lowering the US SWR.
94% US & FM (5% seed) | 6% CCE
NiceUnparticularMan
Posts: 4827
Joined: Sat Mar 11, 2017 6:51 am

Re: Ben Felix: 2.7% Retirement Rule.

Post by NiceUnparticularMan »

Marseille07 wrote: Thu Jan 12, 2023 12:42 pm Well, that's a big can of worms because if you go down that route then arguably 1966 is also impossible to repeat due to changes since then.
In fact I agree that is true, in any strict sense of the term "repeat". A lot of things happened that upcoming period, including the unwinding of the Bretton-Woods system, that couldn't happen today, because there is no Bretton-Woods system to unwind. There are also things that happened that are extremely unlikely to happen today, like the imposition of price controls. Technically that is still possible but today it is incredibly unlikely anyone with the power to do that would actually think it was a good idea.

That said, in a very broad sense, I think inflation in the next long period could be unexpectedly high for a variety of different reasons, not just what happened in the 1970s. In contrast, the sort of deflationary conditions we saw in the Great Depression are not really possible today.
Marseille07
Posts: 12872
Joined: Fri Nov 06, 2020 12:41 pm

Re: Ben Felix: 2.7% Retirement Rule.

Post by Marseille07 »

NiceUnparticularMan wrote: Thu Jan 12, 2023 1:04 pm That said, in a very broad sense, I think inflation in the next long period could be unexpectedly high for a variety of different reasons, not just what happened in the 1970s. In contrast, the sort of deflationary conditions we saw in the Great Depression are not really possible today.
We just have to agree to disagree here. I think both are unlikely (equities going -88% and the FFR hitting 22.36%).
94% US & FM (5% seed) | 6% CCE
NiceUnparticularMan
Posts: 4827
Joined: Sat Mar 11, 2017 6:51 am

Re: Ben Felix: 2.7% Retirement Rule.

Post by NiceUnparticularMan »

Marseille07 wrote: Thu Jan 12, 2023 1:41 pm
NiceUnparticularMan wrote: Thu Jan 12, 2023 1:04 pm That said, in a very broad sense, I think inflation in the next long period could be unexpectedly high for a variety of different reasons, not just what happened in the 1970s. In contrast, the sort of deflationary conditions we saw in the Great Depression are not really possible today.
We just have to agree to disagree here. I think both are unlikely (equities going -88% and the FFR hitting 22.36%).
Well, I didn't actually refer to either of those things. I referred to unexpectedly high inflation over a long period versus the deflationary conditions we saw in the Great Depression.

Of course maybe you disagree with that too. Maybe you think an extended period of severe deflation during the next long period is just as likely as inflation being unexpectedly high over the next long period.

But that's not what you said in response, so I don't know whether or not you believe that.
Marseille07
Posts: 12872
Joined: Fri Nov 06, 2020 12:41 pm

Re: Ben Felix: 2.7% Retirement Rule.

Post by Marseille07 »

NiceUnparticularMan wrote: Thu Jan 12, 2023 1:50 pm Well, I didn't actually refer to either of those things. I referred to unexpectedly high inflation over a long period versus the deflationary conditions we saw in the Great Depression.

Of course maybe you disagree with that too. Maybe you think an extended period of severe deflation during the next long period is just as likely as inflation being unexpectedly high over the next long period.

But that's not what you said in response, so I don't know whether or not you believe that.
Oh nvm, I thought you were talking about the huge equities crash as not repeating because we are talking about the SWR going lower. The deflationary conditions are a tailwind and not terribly interesting to discuss, whether future deflation occurs in the United States or not.
94% US & FM (5% seed) | 6% CCE
NiceUnparticularMan
Posts: 4827
Joined: Sat Mar 11, 2017 6:51 am

Re: Ben Felix: 2.7% Retirement Rule.

Post by NiceUnparticularMan »

Marseille07 wrote: Thu Jan 12, 2023 2:07 pm The deflationary conditions are a tailwind and not terribly interesting to discuss, whether future deflation occurs in the United States or not.
So while the deflation itself can be seen as a positive in isolation, in that case it was necessarily associated with bank failures, financial system collapse, and massive monetary contraction in the US (and others countries as well to a varying degree).

Somewhat famously these days, people have pointed out that once you account for dividend reinvestment and deflation, stock returns recovered much faster after 1929 than many used to believe--like 5 years instead of 25 years. And that is indeed a good thing to know, and feeds into why deflationary stock crises are not really the worst-case sort of scenario for retirees.

However, that is still pretty bad, and part of why it was so bad was the other things necessarily associated with deflation.

So to be precise, when I am talking about it being unlikely that the deflation of the Great Depression happening in the next long period, I am in fact thinking more broadly about whatever could cause that deflation.
Bill Bernstein
Posts: 732
Joined: Sat Jun 23, 2007 12:47 am

Re: Ben Felix: 2.7% Retirement Rule.

Post by Bill Bernstein »

A deflationary scenario is a best case scenario for retirees who are safe-asset heavy, especially in long Treasuries, as Harry Browne pointed out.

It's an awful scenario for everyone else.

Fortunately, the Federal Reserve has printing presses and keyboards, so that seems the least likely of the Four Horsemen of Financial Disaster: inflation, deflation, confiscation, and Armageddon.
User avatar
nedsaid
Posts: 17513
Joined: Fri Nov 23, 2012 11:33 am

Re: Ben Felix: 2.7% Retirement Rule.

Post by nedsaid »

As I recall, Joe Kennedy was in Municipal Bonds during the Great Depression and he did well.
A fool and his money are good for business.
Tommy
Posts: 268
Joined: Mon Mar 07, 2016 10:47 pm

Re: Ben Felix: 2.7% Retirement Rule.

Post by Tommy »

Ocean77 wrote: Sat Dec 24, 2022 1:28 am
Apathizer wrote: Fri Dec 23, 2022 10:57 pm The most recent Common Sense Investing episode discusses safe withdrawal retirement rates. He makes a convincing argument a 2-3% rate is probably more realistic, and that a 4% rate is probably unrealistic.
https://www.youtube.com/watch?v=1FwgCRIS0Wg
I like Ben Felix but one thing I found odd about this video: As he explains, one reason for the lower withdrawal rate is that country survivorship bias should be accounted for (which Bengen did not). Ok so imagine you retired in Russia in the early 1900s with a nice portfolio of Russian stocks. Then comes 1917 and the revolution, and oops, investors are disowned. Surely this is a bad thing. But how would it have helped that investor to use a lower withdrawal rate up until the revolution?
In 1917 investor will lose not only investment but life as well. However, if person had diversified portfolio, with international stocks and manage to escape , he had a chance :)
michaeljc70
Posts: 9592
Joined: Thu Oct 15, 2015 3:53 pm

Re: Ben Felix: 2.7% Retirement Rule.

Post by michaeljc70 »

Leesbro63 wrote: Fri Jan 06, 2023 6:34 am
michaeljc70 wrote: Fri Jan 06, 2023 4:08 am I'm off to the airport to enjoy my retirement. It made me think of it like this. I certainly don't want to miss my flight for obvious reasons. What time do I leave for the airport? The Uber could get a flat tire. There could be a sudden weather incident or accident on the road. I could over sleep. Security could be a mess at the airport. There are literally a thousand things that could go wrong. A lot could go wrong and I get there late and my flight could be delayed so I make it anyway. I could miss my flight and catch one an hour later possibly. It could take 6 hours to get to the airport in Lithuania and get through security. Am I going to leave 6 hours early to get to the airport that is 30 minutes away normally? No, I am not. I'll leave ample time and adjust if I have to.
Cute analogy but it misses severity. If your Lithuania trip gets goofed up, it's a Lithuania trip that's messed up. If your retirement funding gets messed up, it's the rest of your life scrimping on Social Security.
I didn't go to Lithuania, so you missed the point. I don't take Lithuanian airports into account when traveling in the US just like I don't take the Lithuanian stock market into account for retirement planning since I don't invest there.

And no, I am not going to be scrimping living off social security because of one study that is in the minority. I use a VPW, so the SWR is moot for me anyway.
StillGoing
Posts: 110
Joined: Mon Nov 04, 2019 3:43 am
Location: U.K.

Re: Ben Felix: 2.7% Retirement Rule.

Post by StillGoing »

NiceUnparticularMan wrote: Thu Jan 12, 2023 1:04 pm
Marseille07 wrote: Thu Jan 12, 2023 12:42 pm Well, that's a big can of worms because if you go down that route then arguably 1966 is also impossible to repeat due to changes since then.
That said, in a very broad sense, I think inflation in the next long period could be unexpectedly high for a variety of different reasons, not just what happened in the 1970s. In contrast, the sort of deflationary conditions we saw in the Great Depression are not really possible today.
Annualised inflation doesn't have to be all that much higher than historically observed to reduce the SAFEMAX. For example (using cfiresim with a 75/25 portfolio and adjusting the fees to represent increases in inflation/reductions in real returns). For the historical case, SAFEMAX~3.7%, for a 1% reduction, SAFEMAX~3.2%, and for a 2% reduction SAFEMAX~2.8% (i.e., close enough to the 2.7% being discussed here).

One of the reasons that MSWR in the UK (~3.2% for a 75/25 portfolio, see https://www.2020financial.co.uk/pension ... alculator/) is lower than the US is that annualised inflation here has been about 1 percentage point higher than the US over the last century or so (nominal and real returns of UK stocks were 9.4% and 5.2%, respectively; for the US these were 9.3% and 6.2%, Credit Suisse yearbook, 2012).

In other words, small, but persistent, events (e.g., a relatively small increase in average inflation) can also influence SAFEMAX in a way that might not necessarily be readily apparent.

cheers
StillGoing
User avatar
9-5 Suited
Posts: 1203
Joined: Thu Jun 23, 2016 12:14 pm

Re: Ben Felix: 2.7% Retirement Rule.

Post by 9-5 Suited »

Found Karsten Jeske / Big ERN's Twitter reaction to this topic buried in his Twitter replies - was glad to see he acknowledged it. Always interesting to see the perspectives of different respected voices intersecting. Exchange below:

Carlos @triplmath: What are your thoughts on this paper? It calculates SWR of ~2.7% based on world data. I have an issue with the methodology but wanted to get your take.

Karsten Jeske: Useless unless you believe that we will have a repeat of WW1 and WW2, wiping out an entire continent's economy and asset markets. What's your issue with the methodology?

Carlos @triplmath: My issue is that, if I understand it correctly, they are randomly selecting a decade of returns from one country and sequencing these back-to-back. So for a 30 yr retirement, one iteration may be ~10 yrs of Italy followed by ~10 yrs of Germany followed by ~10 yrs of USA. So the SWR will be set by some of the worse combinations of ~3 countries. I think a more realistic approach is to assume market weighting all developed markets for any given year. I believe Wade Pfau made this assumption and got ~3.9% for world portfolio (for 10% failure).

Karsten Jeske: Yeah, that's not a very useful technique. I think it's OK for US investors to do SWR analysis with US stock data. Non-US investors should use MSCI ACWI. The only variation across countries would come from FX risk then.

Carlos @triplmath: I’m curious as to why are you comfortable with only using US data for US investors? Do you think it’s realistic to assume US outperformance to persist this century?

Karsten Jeske: It's not about outperformance. It's about lack of diversification.
Marseille07
Posts: 12872
Joined: Fri Nov 06, 2020 12:41 pm

Re: Ben Felix: 2.7% Retirement Rule.

Post by Marseille07 »

9-5 Suited wrote: Tue Jan 24, 2023 5:02 pm Carlos @triplmath: I’m curious as to why are you comfortable with only using US data for US investors? Do you think it’s realistic to assume US outperformance to persist this century?

Karsten Jeske: It's not about outperformance. It's about lack of diversification.
Is Karsten answering the question the way it was intended? Unless he argues lacking diversification results in a *higher* SWR...
94% US & FM (5% seed) | 6% CCE
User avatar
9-5 Suited
Posts: 1203
Joined: Thu Jun 23, 2016 12:14 pm

Re: Ben Felix: 2.7% Retirement Rule.

Post by 9-5 Suited »

Marseille07 wrote: Tue Jan 24, 2023 5:07 pm
9-5 Suited wrote: Tue Jan 24, 2023 5:02 pm Carlos @triplmath: I’m curious as to why are you comfortable with only using US data for US investors? Do you think it’s realistic to assume US outperformance to persist this century?

Karsten Jeske: It's not about outperformance. It's about lack of diversification.
Is Karsten answering the question the way it was intended? Unless he argues lacking diversification results in a *higher* SWR...
He linked to and referenced this older work from his website, where he argues that international diversification isn't very useful due to problematic correlation patterns during downturns. Is that a possible derailing comment on the Bogleheads forum? :twisted:

https://earlyretirementnow.com/2017/08/ ... ification/
Marseille07
Posts: 12872
Joined: Fri Nov 06, 2020 12:41 pm

Re: Ben Felix: 2.7% Retirement Rule.

Post by Marseille07 »

9-5 Suited wrote: Tue Jan 24, 2023 5:10 pm He linked to and referenced this older work from his website, where he argues that international diversification isn't very useful due to problematic correlation patterns during downturns. Is that a possible derailing comment on the Bogleheads forum? :twisted:

https://earlyretirementnow.com/2017/08/ ... ification/
Well, I think the SWR could actually be higher (at least on a historical data basis) if you include some amount of ex-US because when we say "3.8% SWR (0% failure)" we're talking about 1966~1995, and Japan's rise helped ex-US during that period.
94% US & FM (5% seed) | 6% CCE
User avatar
9-5 Suited
Posts: 1203
Joined: Thu Jun 23, 2016 12:14 pm

Re: Ben Felix: 2.7% Retirement Rule.

Post by 9-5 Suited »

Marseille07 wrote: Tue Jan 24, 2023 5:13 pm Well, I think the SWR could actually be higher (at least on a historical data basis) if you include some amount of ex-US because when we say "3.8% SWR (0% failure)" we're talking about 1966~1995, and Japan's rise helped ex-US during that period.
True, assuming there isn't then another period where the global portfolio would have pushed the SWR below the lowest observed in a US-only portfolio backtest. No idea which way it would turn out.

But overall, I was most struck by how dismissive he was of the methodology and it's implications on withdrawal planning.
Marseille07
Posts: 12872
Joined: Fri Nov 06, 2020 12:41 pm

Re: Ben Felix: 2.7% Retirement Rule.

Post by Marseille07 »

9-5 Suited wrote: Tue Jan 24, 2023 5:25 pm True, assuming there isn't then another period where the global portfolio would have pushed the SWR below the lowest observed in a US-only portfolio backtest. No idea which way it would turn out.
This is what other posters and I discussed somewhere on this thread (we looked at 1915, 1929 and 1937). It appeared like SWR wouldn't have gotten pushed down.
But overall, I was most struck by how dismissive he was of the methodology and it's implications on withdrawal planning.
Well, no offense to anybody but the bootstrap method isn't very good. It had a Monte Carlo effect where you basically end up chaining a terrible sequence of events and lowered the SWR. Now, 2.7% isn't crazy low, but it's doubtful it represents a US investor.
94% US & FM (5% seed) | 6% CCE
User avatar
9-5 Suited
Posts: 1203
Joined: Thu Jun 23, 2016 12:14 pm

Re: Ben Felix: 2.7% Retirement Rule.

Post by 9-5 Suited »

Marseille07 wrote: Tue Jan 24, 2023 5:30 pm This is what other posters and I discussed somewhere ...
Nice! Interesting finding (and I have a global portfolio, so was just the messenger on his comments there). I've also been in the camp of not changing any of my planning or assumptions based on this paper, for similar reasons to what you and Karsten shared.
Marseille07
Posts: 12872
Joined: Fri Nov 06, 2020 12:41 pm

Re: Ben Felix: 2.7% Retirement Rule.

Post by Marseille07 »

9-5 Suited wrote: Tue Jan 24, 2023 5:35 pm Nice! Interesting finding (and I have a global portfolio, so was just the messenger on his comments there). I've also been in the camp of not changing any of my planning or assumptions based on this paper, for similar reasons to what you and Karsten shared.
Rob Berger was also critical of the paper. His argument was kind of along the similar lines; WWI and II destroyed the SWR of losing countries. He opined that we should be using post-WWII data because if WWIII were to occur and if the United States is on the losing end, our SWR gets shot and all the analyses go out the window anyway.
94% US & FM (5% seed) | 6% CCE
coolasadog
Posts: 72
Joined: Sat Dec 15, 2018 12:01 pm

Re: Ben Felix: 2.7% Retirement Rule.

Post by coolasadog »

Marseille07 wrote: Tue Jan 24, 2023 5:52 pm
9-5 Suited wrote: Tue Jan 24, 2023 5:35 pm Nice! Interesting finding (and I have a global portfolio, so was just the messenger on his comments there). I've also been in the camp of not changing any of my planning or assumptions based on this paper, for similar reasons to what you and Karsten shared.
Rob Berger was also critical of the paper. His argument was kind of along the similar lines; WWI and II destroyed the SWR of losing countries. He opined that we should be using post-WWII data because if WWIII were to occur and if the United States is on the losing end, our SWR gets shot and all the analyses go out the window anyway.
This thread makes me think of the Man in the High Castle sometimes
michaeljc70
Posts: 9592
Joined: Thu Oct 15, 2015 3:53 pm

Re: Ben Felix: 2.7% Retirement Rule.

Post by michaeljc70 »

9-5 Suited wrote: Tue Jan 24, 2023 5:10 pm
Marseille07 wrote: Tue Jan 24, 2023 5:07 pm
9-5 Suited wrote: Tue Jan 24, 2023 5:02 pm Carlos @triplmath: I’m curious as to why are you comfortable with only using US data for US investors? Do you think it’s realistic to assume US outperformance to persist this century?

Karsten Jeske: It's not about outperformance. It's about lack of diversification.
Is Karsten answering the question the way it was intended? Unless he argues lacking diversification results in a *higher* SWR...
He linked to and referenced this older work from his website, where he argues that international diversification isn't very useful due to problematic correlation patterns during downturns. Is that a possible derailing comment on the Bogleheads forum? :twisted:

https://earlyretirementnow.com/2017/08/ ... ification/
It is an interesting analysis. But the data is only from 1970-2017 which makes it a lot less convincing.
Post Reply